How to Identify Multibagger Stocks in the Stock Market?

Stock investment has always been recognized as an investment vehicle for wealth creation. However, investing in stocks has a different connotation to investors based on their investing style and understanding level of stock investing. Different types of investors participate in the stock market every day. Some of them are traders who enter with the goal to capitalize on the short-term price fluctuations and make quick profits from frequent buying and selling while some of them are long-term investors who understand businesses and companies’ business models; make long-term investments and wait patiently for the share prices to grow simultaneously with the companies’ earnings.

The investors are always on the lookout for stocks that might not be known for giving quick explosive returns but act as a big mover hold the potential to reward in capital appreciation over an extended period of time.

Multibagger stocks as the name suggests, are the stocks that have high growth potential and can generate multi-fold returns or more in a short period of time. These are the kind of stocks that you can always count on in giving phenomenal returns. It’s obvious for an investor to gets attracted towards the Multibagger stocks however it is not that simple to spot them.

In fact, it is the burning question in the mind of every investor: how to spot the Multibagger stock in the stock market? – It is often because the investors use the rear-view mirror approach to evaluate Multibagger stock instead of trying to understand how some stock become Multibagger and multiply in value.

5 Cues that can help you in Spot Multibagger Stock in the Stock Market

Here, we’re going to discuss some cues that can help you in spot Multibagger stock in the stock market

Company’s Management & Promoter Pledging

If you are to identify Multibagger stocks then you need to seek out companies which have huge growth potential to operate in its industry. In doing so, do not much rely on the market capitalization as any company with huge potential whether be it largecap, midcap, or smallcap can become a Multibagger and offer explosive returns instead lookout for its management.

As you invest in the stock of a company, you become a partial owner of the company as per owned quantity. Thus, it is important to ensure that the company has strong management with an ethical view and visions that benefit the company’s future growth. You should also give utmost importance to corporate governance as a business cannot grow without proper management.

Apart from this, look out for strong promoter pledging as promoters are responsible for the day-to-day management of the company.

Economic Moat

Warren Buffett often used the term ‘Economic Moat’ refers to a company or business’ ability to keep the competitive advantage over its competitors in the market in order to protect its products’ value and market share from its competitor businesses. It is one of the major cues to spot a Multibagger stock where the company prevents itself from its competitors from encroaching the market. This gives the company an edge in pricing power over its competitors in the market to protect its margin in adverse conditions.

This competitive advantage stronghold the position of the company in the market allowing keep innovating and diversifying its services as per demand and let it go strong over the years.

Therefore, it is important to ensure that the company has a strong economic moat and unique business model to capture the market then there is a higher chance that the company’s stock is to become Multibagger.

Return Ratios

A company with high return ratios indicates that the company is using capital in allocation efficiently. It is also a pointer that the company is generating goods returns on the capital employed. The revenue growth and capital allocation models play a vital part in return ratios of a company. Make sure the return ratios are in rising trend – not flat not falling!

Simply, we can say those return ratios are a good cue of identifying a Multibagger stock.

Equity & Debt Levels

The high EPS (Earning per Share) is a sign of how much a company is earning against each share. A company can high EPS if it has low equity base coupled with high return ratios. Lower equity levels increase the chances of a company in becoming Multibagger.

A company can efficiently allocate its capital in operations and business models when it has low debt levels. Companies with negligible or low debt levels have higher chances of becoming Multibagger. Lower debt levels enable a company to use its earnings for growth and fund future expansions instead of paying the debt leading to increase in in revenue growth rate.

So, it is important to analyze a company on the basis of its equity and debt levels to ensure if the company can turn into Multibagger or not.

Future Plans

The share price of a company has a direct correlation to the company’s earnings. If the company has a strong business model and futuristic plans of expansion in along with its offerings then the development can have a material impact on the value of share price in the market.

It is in fact a prime requirement of a company to be Multibagger.

Final Thoughts:

Above are the listed cues of spotting Multibagger stocks in the stock market. If you can spot these underlying characteristics in a company then congratulations! You got yourself a Multibagger stock. To sum up all, we can say that the right way to identify a Multibagger stock in the stock market is to select the companies with small market capitalizations with low institutional holdings and high return ratios. So, leave the rear-view mirror approach and identify the stocks before it starts reaping.